Songs often define moments in life.

Of course, there are the ones society has deemed special – at weddings, sporting events, etc. But the unplanned ones – the song playing when you first drove solo, the songs that got you over a tough time, the songs too good not to play over and over again – those are the ones that build their own personal meanings and become…tangible.

Bring up “The Choice Is Yours (Revisited)” by the Black Sheep and I am back hanging with friends in 9th grade. Bring up any David Grey and I am immediately back in my very tiny first NYC apartment, falling asleep with my roommate less than a foot away in the next bed. I could go on.

Market events also define moments. Some were life-defining moments, too. September 11 will stay vivid forever, along with the fall of 2008 and the COVID shutdown. The tech bubble bursting and the “taper tantrum” of 2013 are notable as well. I could go on here, too.

The beauty of our memories is that we have them to use – to guide us in the lessons but not hold us back in what we can accomplish. The markets and companies have memory too, but it’s usually shorter than it should be. Therein lies the opportunity. Combining financial history knowledge with behavioral analysis, to me, can create, well, music in managing investments.

In today’s terms, I believe we are in a mix of the late 1970s and the early 2000s: Inflation exacerbated by external shocks and global conflict, combined with a post-hypervaluation period. Understanding the drivers of each has helped us navigate our thinking this year. 

Right now, we are watching data that informs Fed Chair “DJ” Powell on growth, employment, and inflation. We are also closely watching earnings, since this is the primary driver of returns for stocks over the longer term, and consumer financial health, since this is a driver of economic health. Let’s take a look at a few:

• As expected, last week’s CPI* report showed inflation peaked for the moment, which makes sense, as gas prices are lower than a month ago. Inflation could continue to cool, but I believe a cooling of growth would need to coincide with a bigger drop (after all, the Fed has a declared target of 2% and we’re still over 8%). One of the biggest risks here is the conflict in Ukraine and Russia’s ability to withhold gas from places they usually sell to (like Europe) as winter approaches, causing oil and gas prices to spike.

• Employment has been very strong, with the last report showing more jobs added in one month than the average of the previous four quarters. While there has been an increase in layoffs in certain industries, they don’t seem to be making a broader impact yet.

• Consumer financial health is generally good. However, one thing on my radar is the risk of increased consumer spending from credit card debt. Data from the St. Louis Fed shows excess personal savings gained during the pandemic (a peak of 33.8%) have been depleted and are at levels not seen since 2009 (now 5.1%). Meanwhile, NY Fed data from the end of June shows that credit card balances saw their largest year-over-year percentage increase in more than 20 years. Perhaps spending has switched from savings to credit cards? This would explain the strong earnings from the credit card companies, too.

When investing, there will never be a time when there aren’t potential risks. You just have to understand what they are, know there could be unknown risks down the line, be in it for the longer term, and feel the vibe of the room – or the market in this case – to decide whether the opportunities are worth it. And as things unfold, you have to be willing to change the song (or make adjustments to your portfolio).

*CPI = Consumer Price Index

Sources: U.S. Bureau of Economic Analysis, St. Louis Fed, and the Federal Reserve Bank of New York

P.S.: I like to refer to Fed Chairman Powell as a DJ since Fed decisions are like music, bad or good, for the markets, and his Q&A “sets'' are so well attended.